Obama is tough on the economy
HA, it's still early and I haven't finished my first giant cup of coffee yet so when I read the following headline I thought it said "Obama is tough on the economy" and I was like no kidding, higher taxes, huge budget deficits, cap and trade...but the headline actually read "Obama gets tough on fuel economy." I have nothing personal against Obama, just politicians in general. I'm sure that McCain and his absolute joke of a Veep would have found some way to screw up the economy even worse.
Even though the headline isn't what I thought at first, as someone who works in the auto industry I do find it very interesting.
In short, Federal government is raising the federal fuel economy standard to 35.5 MPG by 2016. By then, cars will be expected to get 39 miles per gallon and trucks 30 miles per gallon. This is up from the current 27.5 mpg for cars and 23.1 for trucks.
I have mixed feelings about this plan. Part of me loves it because it will reduce the United States' dependence upon foreign oil. Sending a huge chunk of our money out of the country, to people who hate us no less, is terrible for the economy so raising the fuel standards makes sense.
I just have to wonder what this means for automakers. Light trucks and large cars are the most profitable vehicles that they build. Generally speaking, smaller vehicles are less profitable. Requiring unprofitable companies to make more of something with the lowest profit margins doesn't sound like the road to recovery to me.
Perhaps the new standard will cause automakers to accelerate their development of plug-in electric vehicles. If so, that would be fantastic for my portfolio. I own decent positions in two, clean power companies Exelon and FPL.
It will be interesting to see which automakers are able to come out with attractive, high mileage vehicles. The import manufacturers, particularly the Japanese like Toyota and Honda, certainly have the lead in this area right now.
This isn't great news for consumers. The government estimates, which means that these numbers are probably low, that the proposed changes will add around $600 to the up-front cost of cars...on top of the estimated $700 that has already been added to their cost by the previous revisions to fuel economy standards. An additional $1,300 added to the price of the average vehicle is nothing to sneeze at. I realize that people will make some of that money back in the money that they save on gas, but still we're talking about an enormous up-front cost. If one things that $10 per week in paychecks or one-time $250 payments to seniors is stimulative, what would an additional $1,300 every time someone purchases a new vehicle be?
Having said all of this, the changes to the fuel economy rules don't even start until 2012 and who knows what will happen between now and then. It is entirely possible that the government will change its mind between now and then and alter them again.
Part of me wonders if we're rolling out changes like this at the wrong time. Obama seems to have a lot of pots on the fire. I wonder if it would be better for the current Administration to focus all of their efforts on fixing the economy now rather than implementing things that would actually hurt economic growth in the short-run like cap and trade, increased healthcare coverage, higher fuel economy standards. All of these things are good for Americans...but they're expensive and very well could act as a drag upon economic growth.
On the other hand, short term thinking is what got us into this mess. Perhaps these changes will encourage the development of real industries in the U.S. so that we can reduce our dependence upon consumer spending. Hmmmmm.